What is Pitchfork Trading

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The Pitchfork is a beautiful concept introduced to technical analysis by Dr. Andrew's, and this is the name it is being used on trading platforms: Andrew's Pitchfork.

Like the name suggests, this tool looks like a pitchfork, and it has powerful interpretations for the price that follows. Here are some basic things to consider:

Pivot points. The Pitchfork is based on three pivot points or starting points. These are key in the general direction and angle the Pitchfork is moving, and, as such, they are subject to a lot of controversies. Where to you put the pivot points may make the difference between a profitable or a losing trade.

Parallel lines. From those three pivot points, three parallel lines are projected further in time (or on the right side of the screen). They are called UML (Upper Median Line), ML (Median Line) and Lower Median Line (LML).

Median Line. The most important line of them all is the ML one. Its main characteristic is to attract prices.

Two identical channels. Because of the Pitchfork creation, two identical channels are being projected on the right side of the chart. If the price stays within the projected channel, the Pitchfork is still valid.

Rarely a Pitchfork is a horizontal one, and, as such, we're looking to interpret and trade dynamic support and resistance levels derived from it. These are more powerful than classical or horizontal support and resistance levels are defined in the basic technical analysis interpretation.

Trading with a Pitchfork

There are two main reasons why traders use the Pitchfork in their trading forecasts. One is to make sure the underlying trend is still valid.

In this instance, Andrew's Pitchfork is a great tool that offers levels to add to a position or to re-enter a trend on a pullback. Another one is to have a confirmation that the trend is already done and, if so, a new Pitchfork in the opposite direction can be used.

Hunting the Median Line

The Median Line (ML) is by far the central piece of the Pitchfork. The more time price spends within the two resulting channels, the more chances are that the ML will be tested and retested multiple times.

The MetaTrader platform, the most popular trading platform for the retail traders, offers the Pitchfork tool under the Insert/Andrew's Pitchfork tab. This tells much about the importance of this trading tool as it is easy to reach to it.

The chart below shows the daily time frame on the EURUSD pair and highlights the consolidation the pair made for the last two years. It dropped from 1.40 to almost parity as the ECB (European Central Bank) aggressively cut rates and eased the monetary policy.

However, it is not able to break lower and, if it is not doing that, we can use a Pitchfork to define the range and to forecast future prices. The three pivot points are highlighted as they represent the pivot points that define the Pitchfork.

The way to interpret the validity of any Pitchfork is to look back at past prices and see if the ML had any significance in the past. That is, if it offered support and resistance and, in general, if it attracted prices.

We can see that this happened multiple times, to be more exact, six times before we could draw the Pitchfork. The logical assumption is that price will be attracted by the ML further in time if it stays within the defined channel.

Therefore, a revisiting of the ML is possible and the bias on the EURUSD pair moving forward is bullish. Again, providing price is staying in the rising channel. A break below will invalidate the pivot point.

Pitchfork and Fibonacci

Another trading tool that is extremely popular and widely used in the technical analysis is the Fibonacci tool. There are either Fibonacci Retracement or Expansion levels that can be used, and, in conjunction with Andrew’s Pitchfork, they offer great dynamic support and resistance levels further in time.

We must mention here that Fibonacci should be used only after the price is dropping out of the resulting channels of a Pitchfork. In other words, in our previous EURUSD example, the third pivot was placed at the last market low the pair made: 1.0340.

If the price stays above this level AND above the rising LML (Lower Median Line), we should look for the ML line to attract price. However, if it breaks the LML, the tendency is that it will further move lower.

To avoid fake moves (the Forex market is full of fake moves destined to trip stops only for the market to return in a violent fashion afterward), Fibonacci levels can be used, derived from the length of the rising channel. The MetaTrader platform doesn’t have this possibility incorporated in the standard offering, but it can be imported as a separate indicator.

Other trading platforms like the JForex (a trading platform developed on the Oracle’s Java) allows to set Fibonacci variations for the Pitchfork trading tool and the result will show different parallel lines projected at different Fibonacci levels. Expect the price to hesitate on any intersection with these lines.

To sum up, Andrew’s Pitchfork is a tool designed to keep traders on the right side of the market. No matter what your convictions are, bullish or bearish, what the fundamental factors behind them are, the market is not going anywhere if it stays between the two well-defined channels derived from the Pitchfork.

This makes the tool visible and easy to interpret. The only thing is to be flexible with the pivot points and to understand that fake moves can happen all the time, without the overall interpretation to change.

What will change is one or two pivots, and the resulting channel will be the same. This tool works great on bigger timeframes, starting with the daily one and above as it gives the overall idea about a market trending or not, and what would be the levels to invalidate that.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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